Should You Be Adding Teradyne (NASDAQ:TER) To Your Watchlist Today?

It's only natural that many investors, especially those who are new to the game, prefer to buy shares in 'sexy' stocks with a good story, even if those businesses lose money. But as Warren Buffett has mused, 'If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy.' When they buy such story stocks, investors are all too often the patsy.

So if you're like me, you might be more interested in profitable, growing companies, like Teradyne (NASDAQ:TER). Even if the shares are fully valued today, most capitalists would recognize its profits as the demonstration of steady value generation. Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.

Check out our latest analysis for Teradyne

How Fast Is Teradyne Growing Its Earnings Per Share?

In the last three years Teradyne's earnings per share took off like a rocket; fast, and from a low base. So the actual rate of growth doesn't tell us much. As a result, I'll zoom in on growth over the last year, instead. Like a firecracker arcing through the night sky, Teradyne's EPS shot from US$1.05 to US$2.80, over the last year. Year on year growth of 167% is certainly a sight to behold.

I like to see top-line growth as an indication that growth is sustainable, and I look for a high earnings before interest and taxation (EBIT) margin to point to a competitive moat (though some companies with low margins also have moats). While we note Teradyne's EBIT margins were flat over the last year, revenue grew by a solid 4.9% to US$2.2b. That's a real positive.

The chart below shows how the company's bottom and top lines have progressed over time.

You don't drive with your eyes on the rear-view mirror, so you might be more interested in this free report showing analyst forecasts for Teradyne's future profits.

Are Teradyne Insiders Aligned With All Shareholders?

We would not expect to see insiders owning a large percentage of a US$11b company like Teradyne. But we do take comfort from the fact that they are investors in the company. With a whopping US$54m worth of shares as a group, insiders have plenty riding on the company's success. This should keep them focused on creating long term value for shareholders.

It means a lot to see insiders invested in the business, but I find myself wondering if remuneration policies are shareholder friendly. A brief analysis of the CEO compensation suggests they are. I discovered that the median total compensation for the CEOs of companies like Teradyne, with market caps over US$8.0b, is about US$11m.

Teradyne offered total compensation worth US$7.2m to its CEO in the year to December 2018. That comes in below the average for similar sized companies, and seems pretty reasonable to me. CEO compensation is hardly the most important aspect of a company to consider, but when its reasonable that does give me a little more confidence that leadership are looking out for shareholder interests. It can also be a sign of good governance, more generally.

Should You Add Teradyne To Your Watchlist?

Teradyne's earnings per share growth have been levitating higher, like a mountain goat scaling the Alps. The sweetener is that insiders have a mountain of stock, and the CEO remuneration is quite reasonable. The strong EPS improvement suggests the businesses is humming along. Teradyne certainly ticks a few of my boxes, so I think it's probably well worth further consideration. While we've looked at the quality of the earnings, we haven't yet done any work to value the stock. So if you like to buy cheap, you may want to check if Teradyne is trading on a high P/E or a low P/E, relative to its industry.

Although Teradyne certainly looks good to me, I would like it more if insiders were buying up shares. If you like to see insider buying, too, then this free list of growing companies that insiders are buying, could be exactly what you're looking for.

Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction

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